Martin: Welcome to the business owners’ podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory team.

Well welcome everybody to season 6 of the podcast. We’ve got a very special season this time because we’re going to be talking all about franchising, and as part of that discussion we’re also going to talk about some broader themes around getting some really good systems and processes in your business and really changing your business from one that’s dependant on you, the owner, to one that has business goodwill that is ultimately saleable. We’ve mixed up the format a bit this time because we’ve got a panel format, and so for the next four episodes we’re going to bring our elite panel back, and we’re going to talk about a number of different aspects of franchising and systematising your business. I’ll quickly introduce our panel, firstly we’ve got Corina Vucic, hi Corina!

Corina: Hi Martin, how’re you going?

Martin: Very good thank you! So, Corina is a franchise specialist, she’s the Director of FC Business Solutions and she has worked in the franchising industry her whole career. She’s had senior roles at places like Coles Myer, Autobarn and Clark Rubber – and she’s the trusted advisor to many of Australia’s largest and/or growing franchise networks and she also works closely with business owners, both who are looking to franchise or those who simply want to get some better governance systems and processes in their business whether or not they’re going down a franchising path, so welcome Corina!

Corina: Thank you!

Martin: Next on our panel we’ve got Ben Fletcher! Welcome, Ben!

Ben: Thanks Martin, thanks for having me!

Martin: You’re very, very welcome. Ben is the owner and franchisor of Listen to Your Body which is a group personal training business and he’s got seven outlets currently in Victoria and looking to expand. Ben is a long term trusted friend and client of Mills Oakley.

Ben: Thanks Martin.

Martin: And our third panel member is my colleague Greg Thomas. Greg’s a senior lawyer in our team and he’s got many years of broad commercial and legal experience advising business owners, both those who have franchise businesses – but also those who don’t. He brings a wealth of expertise in that area, both in relation to the technical legal side of things and in relation to broader business and governance insights, so welcome Greg!

Greg: Thanks Martin, it’s an honour being part of your esteemed panel!

Martin: Oh, you are very, very welcome and we’re delighted to have all of you here today! So for our first episode of the series we’re going to talk about the question of “should I franchise my business?” I know that this is a question that a lot of our clients consider from time to time, because of course if you can get it right there can be so much leverage and so much benefit from a franchising model, and particularly that aspect of the franchisees having the skin in the game and lifting the performance of the entire network, and also of course providing the capital to grow more rapidly.

So Corina I’ll start with you because I know this is a discussion that you often have with your clients.

If I was a business owner coming to you and looking to franchise – what would be some of the advice you would give me?

Corina: Thanks Martin. I think the first thing that I’d say to you is:

“Why do you want to franchise?”

Is it about wanting to build a national brand? Is it about getting to market quickly before someone else? And the last and final one would be, are you ready to actually be a franchisor versus running your own store or running your own outlet. Most people don’t view it as being someone who needs to step into a franchisor role, they think that just because they’ve run their store, run their outlet or their business well, that the transition into being a franchise leader is just really easy – and yet the skill set of looking at it from a macro perspective and having a strategic approach is very different to having something that’s got four walls and that’s all you’ve got to be accountable for.

Martin: That’s fascinating Corina, because you’re right – they are very different skills, aren’t they? I am interested in your thoughts, it would probably be very hard to do both?

Corina: Absolutely. To want to franchise as an individual you’ve got to have a bit of ego about you. In many instances when you’re sitting with a potential franchisor, you know that they’ve done well, you’ve looked at their numbers, analysed their brand, analysed their point of difference – and sometimes the bloody tough conversation to have with someone, to look at them and say “love what you’ve got, but I’m not really sure that you’re going to be able to translate into being a franchise leader, because it takes a different people skill and a different set of empathy and influencing skills, that up until now you’ve probably not had to step up”.

Martin: And there really is a parallel, a particular interest of mine, as you know, is preparing for sale. There’s a ready parallel with that isn’t there? To put it another way, it’s about being able to work on the business first, not work in the business – it’s that old paradigm. If you can’t be somebody who can pull themselves up out of the day-to-day and work on the business, I imagine franchising is going to be a difficult strategy!

Corina: Absolutely is, Martin. Your franchisee doesn’t want to see you making cups of coffee – the franchisee wants you setting strategy, doing research and development, and creating an inspirational community around your franchise brand that motivates and leads them into their next wealth goal at a local level.

Martin: Wow! So hey, Ben! Corina’s just told us you need an ego to be a franchisor!

(laughter)

Ben: I did think of that when Corina said that! I was feeling my head get a bit bigger, thanks Corina!

Corina: You’re welcome! (laughter)

Martin: Tell us about your experience in that regard, because – if I can make you blush – you’ve grown and run very, very successful personal training studios, but then you moved into a different space when you became the franchisor. Tell us about that transition.

Ben: Well, the transition … when it all started in 2012 officially for that 12 months, it was a good 3 or 4 years building up to that stage, so … I always wanted to have multi-sites and I wanted to grow and – probably part of that ego, there, Corina! I felt that with what we did as a business and the unique model we have, it was just too good to only share with one community. That’s why I decided the franchising model was the way to go, to be able to get out to more communities faster, obviously leveraging capital from other people and using our brand and helping support that. The process to do it was a long one. It was quite an easy decision to do it, to work out how to do it and how it will all look – that took a lot of planning and a lot of consulting, which was in hindsight a fantastic process to go through, but it was a very good time to be able to get the model ready to go to market, having a period of time to pilot a new, or first franchise, so then we could progress from there. It was all over a 5 year period until we got fair dinkum.

Martin: On a practical level and just hearing you speak, that’s an awful lot of work isn’t it? Because at the same time you’re running an operational business, right? Which wouldn’t be a 9 – 5 business of itself! And then really building that franchising aspect on the side, if you like.

Ben: Yeah – what I did, once I got into franchising I’d actually spoken to a few people and it sounds like simple strategy but I read a lot of magazines on franchising – I got very inspired by a lot of articles to do that – and I spoke to a fair few people. I made a really firm decision to invest into it and part of that investment was to put on two full-time employees to cover my workload in the studio. I got a little office in Moonee Ponds at $130.00/week and just chipped away all day, every day in that office to build the system and to try to work out … because I did understand, even back before we went into this unique model, we had an 8 year personal training one-on-one. We were really fortunate to have that grounding. That was a big business with nearly 20 staff and 400 members, but I knew to transition from being a personal trainer to a studio manager which I felt I’d mastered those levels – to go to the next level I needed to do it properly. There’s always something to do differently, continue to change – but yeah, I really needed to put in that time before we went to market, yeah – so was able to do both pretty well.

Martin: That’s great Ben.

And Greg, from your perspective as a lawyer working for business owners who are thinking of taking this step, what would your advice be to them?

Greg: Something Ben said resonates with me about “don’t rush into it”, Martin. Are you ready? Is your business able to be franchised? It’s a very crucial element as to whether it can be replicated or the systems can be documented properly, so … it’s not a good idea to rush into it, Martin! Although sometimes I see people who accidentally have become a franchise and they don’t realise they are operating a franchise – and that’s another area where they are in a bit of danger there, because they haven’t complied with the franchising code and they’ve accidentally dropped into it!

Martin: And that’s a really fascinating point. It’s a little bit tangential but it’s such an important point. Could you give us a two-minute snapshot, because I see that issue all the time, and particularly when we come to sell businesses – we’ve got a network of licensees and you know, they use our brand and it’s a great little revenue stream which we now want to sell at a multiple of earnings – but the lawyers who do the due diligence often have a different view, right?!

Greg: Yeah, that’s correct. I mean, there’s definitions of what a franchise agreement is in the franchising code. Usually the thing that differentiates between a licence and a franchise is there has to be some sort of system or marketing plan which is controlled by the franchisor. In a simple licence arrangement there’ll be some IP, a trade mark, there’ll be a payment and an agreement, but there’s no system that’s being followed or controlled by the franchisor. There are variations of the theme but that’s where the differences come so, you’ve got to be very careful.

Martin: Yeah, and if you stuff it up, so if you’ve inadvertently got a franchise but you don’t have the disclosure documents and you don’t have the other compliance, I mean, that can kill your business exit, right?

Greg: It can. I mean it’s no good for your brand for a start!

Martin: Yeah.

Greg: And also you’re running a system you didn’t think you were running, and also there’s fines that can be imposed and penalties, and that sort of thing, so … it’s not a great way to start your new business.

Martin: Yeah, so clearly getting that documentation side is really important in terms of the set-up. What about the corporate structure, Greg? So say if I come to you, I might be a normal kind of business owner, I’m running my business through a family trust which I’ve done for years, but now I want to be a franchisor. Do I have the right structure to do that?

Greg: Well, structure is obviously based on a couple of very important parts, being asset protection and tax. You’ve got to make sure your tax advice is spot on – and also in relation to asset protection. So, a very common structure in franchising is that you park the IP or the trade mark into a separate company, that will license back to the operating company, the franchisor, who will be distributing the franchise agreements out.

Martin: That’s great, Greg.

So back to you, Corina – we’re back to your hypothetical client who’s maybe looking at setting up a franchise business. You’ve spoken with them about the ‘why’ of that, and you’ve spoken with them about their strategy and why that makes sense for them, what’s the next step? What is the process to turn this from a good owner/operated single-site business into a franchise network?

Corina: We send the budding franchisor with their excitement in their eyes back to their own business – it’s like falling in love sometimes … they fall in love with franchising until they come and sit with a realist! So, we actually send them back to their business and we say to them “unless you can come and sit with me and you can give me at least what I call 3 to 5 years with some sort of trade figures, and some sort of balance sheets on profit and loss, and you can explain to me the seasonal fluctuations and changes … and then you can actually demonstrate that I can buy into your business and successfully look at being able to replicate what you’ve done”, then it’s best that you go and find someone else to talk to because you’re wasting my time! And we’ve had some classics come through and do that, Martin, so that’s the first thing we do! We go off and we ask them to do some real analysis on their own financials, because at the end of the day those financials will actually set up the modelling base of us having a look at whether there is actually a business there, what the cost structure is inside that business and more importantly, that if they actually turn into a franchise, if a franchisee is inspired to buy into their vision, that they can actually be able to have a strong financial model that underpins that, and is able to pay to a royalty or pay to a marketing levy or anything else. That’s our first stage.

The second stage of that is if they do come back and they’re still budding and looking very much in love with this concept, then we start having those conversations with them of there are some structures you’ve got to put in place, that’s not our job – you need to go see the legals, I need you to go and access the franchising code of conduct and I need you to start doing due diligence in that area. That’s where we start.

Martin: That’s great. And then with things like the operations manual, I mean, they can just print that off the internet, right? They could just find one and proceed on that basis?

Corina: Oh, Martin! I’ve seen templated franchise agreements arrive with budding people who are a mixture of a service outlet and a retail business and all of the above, and it’s very interesting when you get into the clause discussions with them. The operations manuals, we always ask our budding franchisors to go back and actually start pulling apart what their current systems are in their business, and start pulling together checklists and forms and policy and procedures – because more often than not, they do not have what we would call an “operating system” and that’s where we start, and that’s where we send them back as well.

Martin: Yeah, I mean I can only imagine – and I’m generalising here – I mean some private businesses have wonderful and well-documented systems and procedures, but I can only imagine that wouldn’t be the norm!

Corina: We received in recent times, and you’ll laugh about this, we received an operations manual that was almost 40 years old and it was cut and paste, and that’s what they’re running in a current system. And when you have a discussion with a franchisor about the risk factors or if you’re selling this as a franchise potential, how is it that your franchisees are following a system and … you know, the response is very interesting. It’s like, well, it’s a manual, but we really don’t do it that way – and I think our philosophy is in franchising, that the manual goes hand in hand with the franchise agreement to deliver a system.

Martin: It’s the value that you’re selling, right? You know, for any prospective franchisee it’s a question of “do I need you or can I do it myself?” That’s the equation that’s going through their head. If it’s a templated operations manual, there is no value at all in that. That is the core IP of the business. You could just do it yourself without that.

Corina: You could, Martin. And I think the other thing in franchising, and in the world we live in today, is when you’re buying into a franchise you’re buying into a system in a box and you’ll expect that the risk factors in business you would expect to be covered off in some sort of methods policy and procedures and quite often you’ll find that even franchisors choose to cherry-pick what they want to provide in that system vs what they don’t want to, and sometimes you find that that clause has stress points for both the franchisor and the franchisee, ultimately as well.

Martin: So Ben, I want to pick up a couple of comments that both Greg and Corina have made and just hear your experience from a practical perspective. So I’ll give you a two-pronged question. Firstly, tell us about your own corporate structure and how you’ve set that up to facilitate the franchise, and secondly tell us about your operations manual and some of the challenges that you have experienced in terms of getting that right and refining that product.

Ben: So the first one, what Greg said was exactly what we’ve done with our corporate structure with holding one trading company and one holding the IP there, and underneath that, so that is correct, that’s one company we trade out of, and one where we hold everything – so that corporate structure is spot on. We do have a family trust, we couldn’t use that as a franchisor, that’s a separate company there. The second part is the operations manual, so we started building our operations manuals in 2004, 8 years before we franchised from a personal training point of view, and each year we did an upgrade. As we went to 2012 and we officially franchised, we realised our operations manual was very good general information but not amazing at “how-to”, and that’s what we pulled together, and we did get better at the how-to. From a practical sense in the field, what we’ve found is that the operations manual is an amazing tool for the training induction and it can sometimes get left by the wayside when they start operating, our franchisees, which is a good reference point for us to revert back to, so, it can be a challenge at times to have everyone on board with going to page 31 point 2.4, how do you run this, and reverting and knowing that manual inside out, which is an ongoing challenge for the franchisor to get that connected – although it is pretty good, and continuous. What we’ve done in a recent update which is quite interesting, I’d be interested to hear Corina’s thoughts on this, but as well as the ‘how-to’, we’ve actually done different themes for our latest upgrade for our annual conference in July – we’ve got a big bulk of our operations manual that is structured around how a week will roll out from a systems point of view – so instead of having page 31, check on how to do your accounts, Monday 9:00am and it’s formatted from Monday through ‘til Friday – it’s the skeleton of the operations manual which is an interesting concept so what we’re hoping is that people can follow systems in a timely manner and get better at their time management. Because as good as these systems are, it’s about when they’re executed and how they’re executed in the follow-ups for that, so they know the time to do it. We should be able to pick up the phone at 11:00 Monday and call every franchisee and we’re all doing the same thing, and that’s what our goal is.

Martin: That’s interesting, Corina we can speak off air about that? That was great Ben, and really, to me, brings home the rigour of this process and the detail to which you need to go to actually add value and to attract the franchisees to your system. Well, the session has flown by in terms of episode one, we’re pretty much at the end. We’ve heard some wonderful insights around whether you should franchise and how to set it up properly. Maybe I’ll just quickly whiz round the room and I’ll just ask each panellist to tell me the number one mistake that they see new franchisors making. Corina.

Corina: Not understanding their roles and responsibilities as a franchisor.

Martin: Perfect, thank you! Ben?

Ben: 100% underestimating the work load!

Martin: (laughs) That was said with a slight kind of grimace on the face!

Ben: No no no, not bitter at all!

Greg: Rushing, and not getting proper advice. I also want to mention that there are so many different systems these days in franchising, just a stock-standard operations manual won’t wear it.

Martin: That’s right, so if anybody out there is thinking about logging on or Googling ‘Franchise System for me’ or something, you’ve heard some very wise counsel on this podcast. So thank you everybody and we look forward to seeing you next time!

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